Resilient Agribusiness

Key Points
The recent increase in productivity growth may be associated with a surge in productivity in the economy generally. Factors thought to contribute to this surge include;

The greater openness of the economy to trade and investment
The continuing deregulation of markets and institutions, and
Efficiency gains in the computer, telecommunications and transport sectors

There will be further increases in competition in global markets. There is more output from developing countries and there is an increasing demand for sustainable and ethically produced, differentiated products.

Productivity trends

In any economy, productivity growth is an important source of wealth and a stimulus to increasing living standards (Australian Farm Institute 2007). Productivity growth in agriculture has been associated with economic development, because increased agricultural productivity frees up resources for use in other sectors of the economy. Productivity can be thought of as a measure of the efficiency by which inputs (i.e. land, labour and capitol) can be converted to outputs (i.e. goods and services). Productivity growth occurs either when ways have been found to increase output from a given level of inputs, or to produce the same level of output from fewer inputs. It is important because it leads to higher incomes and living standards. About 70% of the current real value of Australian agricultural output can be attributed to productivity growth that has occurred since the early 1950's.

Most studies of productivity growth at an enterprise level in Australia are based on the ABARE broadacre survey dataset, including dryland cropping and extensive livestock industries such as sheep and cattle. There is no information about productivity in horticultural industries and little information for irrigated agriculture (mainly dairy).

Over the past 50 years the rate of productivity growth in Australian agriculture has averaged 2.5% per annum. It is highly variable, falling in 18 of the 50 years, with the falls largely reflecting seasonal conditions.

Productivity on cropping farms consistently exceeds that on livestock farms and this has not been explored in any depth in the literature. One possible explanation is that livestock activities are generally more labour intensive, so increase in real wages will limit productivity gains.

Productivity gains in horticulture would be similarly limited. Other possible gains include the scope for genetic improvement in crops is higher than livestock and there are many inputs including fertilizers and pesticides and technological advances in these areas will deliver productivity gains for the cropping industries. Horticulture would also gain from advances in these inputs. Lastly, increasing farm size is suspected of delivering more productivity gains from the economies of scale effects in the cropping industries than livestock. Similarly, horticulture could realise this advantage.

The recent increase in productivity growth may be associated with a surge in productivity in the economy generally. Factors thought to contribute to this surge include;

The ABARE research report on horticultural farm performance for Mildura - Wentworth concluded that over the medium term there are likely to be further increases in competition in global wine, citrus and dried vine fruit markets. For Australian producers to maintain or improve their competitive position in these markets, they will need to improve farm productivity to keep pace with overseas competitors. This may be realised as either improvements or differentiation in the quality of production or reduction in production and supply costs. Any reduction in production costs will flow through to improved farm financial performance. Large farms will benefit greatest from any reduction in costs on a per hectare or per tonne basis.

Trade/Market trends for commodities

Two significant trends are evident in global agricultural markets. The first is a steady increase in agricultural output from developing nations, especially in markets for relatively undifferentiated bulk commodities. The second trend is the rapid growth in sales of high value produce, such as convenient and organic food, especially in wealthy markets, that must also be produced in environmentally sustainable systems and have additional health benefits.

Citrus

Globally, citrus production has increased at an average rate of 2% per annum between 1980 and 2004 (ACG Industry Strategic Plan 2006 to 2011). Oranges are the dominant citrus variety with easy peelers showing significant growth since 1980. World citrus consumption is expanding rapidly in developing countries for all varieties, especially easy peelers. However, in developed countries, annual consumption of fresh citrus is falling although processed citrus consumption is growing rapidly. As traditional demand has plateaued, several large producing countries have begun to export a higher proportion of their product, in conjunction with increasing supply of higher quality, low cost export fruit from newly developed countries. These developments have placed increased pressure on traditional markets and suppliers. Australia is a niche player in the global citrus market with 0.6% of global production.

Australian production for 2007/08 is estimated to be at 560,000 tonnes, down from 660,000 tonnes in 2006/07. Average production since 2002/03 has been 680,000 tonnes. The trend has been for increases in production of navel oranges and mandarins. Marketing has been split 28% export, 38% domestic fresh and 34% juice processing (2005 figures). Australia has a strong export history exporting approximately 180,000 tonnes per annum. Australian citrus is counter-seasonal to the Northern Hemisphere and is regarded as high quality fruit. Asia is the major export destination for Australian citrus, although USA is the largest single export market. Exports are declining to all Asian destinations.

Australia imports approximately 7% of fresh fruit and 66% of juice supply, mainly as frozen concentrated orange juice (FCOJ). Consumption of fresh citrus has increased only marginally over the last decade while juice consumption has continued to increase by over 50% in the last 10 years. Juicing fruit prices often set the price for domestic fresh orange prices and is of critical importance to orange grower profitability.

Grower numbers have shrunk by 19% since 2000, with over half of the orchards less than 10ha in size.

Opportunities for increased export volumes are seen now that there is a protocol in place for China while challenges are to keep other Asian markets open due to increased bio-security scrutiny and demands.

Wine Grapes

Australian wine grape production for 2006/07 was 1.4 million tonnes, down 500,000 tonnes on the previous year. The wine industry is expecting a slight improvement in the 2007/08 harvest. ABARE predicted a 1.5 million tonne crop assuming average winter rainfall and the effects of frost damage in 2007, and predicts a further increase to 1.93 million tonnes in 2008/09, close to the record production of 2004/05. Bearing area is projected to increase to 161,000 hectares in 2007-08.

The Murray Valley wine grape growing area, with it's ideal climate, produces over 20% of the national crush. It is also leading the development of alternative wine grape varieties, that could be better suited to the predicted increase in extreme weather.

DPI (Department of Primary Industries Australian Regional 2007 Wine Grape Crush Survey for Murray Darling - Swan Hill) predicts that from 2008 the demand for most white and red grape varieties will remain constant but the quantity of committed purchases will decrease significantly in favour of spot market buying. Prices for most wine grape varieties have fallen significantly since 2002 (one exception being Muscat Gordo Blanco). ABARE (Regional Outlook Conference Mildura 26 July 2006), forecasts that with a growing focus on export wine sales, prices for Australian wine grapes are projected to decline in response to increasing competition from other wine production countries as growth in supply outstrips growth in demand. ABARE estimates that the Australian weighted average price for red wine grapes is forecast to fall further than white wine prices.

Table Grapes

Table grapes are a large component of the Mildura regions grape production, accounting for almost 70% of Australia's total table grape production. Table grape growing is very labour intensive and great numbers of permanent and itinerant workers, including backpackers are employed by this industry. 60% of table grapes produced in Australia are consumed domestically and 40% are exported. The main destinations are Hong Kong, Singapore, Malaysia and New Zealand.

Dried Vine Fruit

Australia produces 5% of the world's dried grape production with 95% produced in the Sunraysia Region. Production has decreased by 70% since the mid-1970's. The Region is well suited to grape production for the dried fruit industry with the dry climate, sandy soils and irrigation. The industry has been globally recognised as producing premium, light golden coloured fruit, realising a 20% in domestic and 40% price premium in export markets, but faces stiff competition from a cheaper imported product. The industry is dominated by one large processor, Sunbeam Foods, and they believe there is an unfounded fear that the industry is likely to become dominated by imported fruit. Sunbeam is concerned that it is increasingly difficult to source Australian fruit due to falling production volumes. Production in 2008 will be approximately 10,000 tonnes and the industry peak body (ADFA) believes 35,000 - 40,000 tonnes is required for the industry to be sustainable.

Australia has a high level of domestic per capita consumption of dried vine fruit, with about 70% of local production consumed domestically. Dried vine fruit has a place within the healthy, convenient food initiative sweeping global food markets and there is some promotion to this effect internationally.

There is strong demand for a small volume of organic product which commands substantial price premiums.

Nuts

The production of nuts is a rapidly growing part of the Australian horticulture sector and almonds are the fastest growing horticultural industry in Australia (ABA news release Jan 2008). The Australian almond industry is concentrated in the Sunraysia (55% of Australian almonds) and Riverland areas. Sunraysia is also one of the main pistachio producing areas and 97% of the Australian crop is processed in Robinvale. Australian nut production is expanding at over 10% per annum. Production will increase 50% over the next five years as the existing non-bearing trees reach production and double within the next 10 years. Australia is a net exporter of almonds with production in 2007 at 26,500 tonnes (kernel), expected to increase to 77,000 tonnes by 2015. About 1,500 tonnes of pistachios are currently produced in Australia annually.

Australia currently produces 3% of the worlds almonds (Annual Report 2007 ABA) while USA produces almost 80%. The long term outlook is very positive for the continuation of an economically viable, internationally competitive industry;

Globally almond consumption has more than doubled over the past decade and this trend is expected to continue due to their great taste, versatility and the positive nut health message.

Australia is able to service niche export markets that seek a reliable, high-quality product. There is a growing demand for Australian almonds from India, Europe, Japan, Hong Kong, New Zealand and Middle East.

Olives

Demand for olive oil worldwide is on the increase due to the increased awareness of the health benefits and the continuing increase in Mediterranean cuisine. Extra virgin olive oil, which is the highest quality oil, is especially sought after. Virtually all Australian olive oil is extra virgin. Australia is ideally placed to support a modern olive industry with its Mediterranean climate, excellent horticultural infrastructure and expertise. The Australian industry is mechanised, uses the most modern production techniques, and is a relatively boutique industry, it is therefore in a very strong competitive position. Australian olive oil production has recently expanded rapidly from 380,000 litres in 2000 to 9.4 million litres in 2007 with an estimated 14 million litres in 2008. Export volumes and values have increased rapidly to match. The major countries for export destination are USA (35%), Italy (23%), Spain (12%), Japan (6%) and New Zealand (5%).

The key issues for a continued and sustained growth in the Australian Olive Industry, according to the Australian Olive Association are;

A reasonable price, acceptable taste and reliable supply of sufficient volumes of consistent quality oil are all required to gain acceptance and shelf space in supermarkets. This is important in underpinning the growth of the industry.

Economies of scale and modern production techniques based on worlds' best varieties and practices can place Australia in a strong competitive position. Even so, it must be recognised that there is competition from other Southern Hemisphere producers and from other vegetable oils, such as canola.

Vegetables

The Mildura region produces almost 5% of Australia's vegetables. Carrots, asparagus and potatoes are the main vegetables, with over 20% of the nation's carrots and asparagus produced here. Green asparagus is produced year round for fresh consumption and Japan and Taiwan are important export markets.

A NRE report (Giles, R. et al 1996) found that there is considerable potential for major expansion of potato production in northern Victoria but concluded that Bendigo or Echuca, rather than Mildura, was suitable for a potato processing plant location.

Melons are another significant (annual) crop for the area, with 11% of the nation's melons produced in the Mildura region.

Organics/Bio-Dynamics

Organic and Bio-dynamic production is considered to have enormous international growth potential. Demand is being fuelled by greater consumer awareness on issues ranging from health and nutrition to food safety, labelling and genetically modified organisms and environmental issues. Growth estimates for Australia from the Rural Industries Research and Development Corporation are 20-25% per annum; worldwide the growth is about 30%. The number of certified operators in Australia is increasing at a rate of 7-8% per annum (NASA).

The expansion in the number of certified Organic and Bio-Dynamic producers is reflected in the Mildura Region, but the local industry remains small. Produce grown organically or bio-dynamically includes wine, table and dried grapes, citrus, avocados, stone fruits, nuts and vegetables. Dry growing conditions are regarded as a considerable advantage, reducing the incidence of crop disease.

A report prepared for RIRDC (McKinna. D. 2006 (hard copy)) concluded that the demand for organics is more likely to be stronger for products within the following parameters:

Many of the horticultural products produced in Mildura satisfy these parameters.

Other crops

A detailed report was prepared by Scholefield Robinson Mildura for the Mildura Rural City Council in 2006 on the 'Opportunities for Value-Adding and Regional Diversification'. The report identified cost reducing, value adding and supply chain structure and management opportunities as well as a range of new crops and enterprises.

Nineteen new crops and enterprises were assessed for market conditions, physical, technology, value adding and collaboration requirements and economics. Pomegranate juice is one example of a suitable alternative crop. Collaboration, economies of scale and good market information are key factors in determining the success of any new crop. The list is not exhaustive and does not include for example dates and capers. Dates have been successfully established in the Riverland recently.

In addition to the global trends in consumption and production, a great threat to our access to high value markets is the growing concern about the environment. In particular the issue of climate change has grown in importance as seen through the application of the Kyoto Protocol and issues such as "food miles".

A Lincoln University report found that UK agricultural production systems often use much more energy than New Zealand systems, and even taking transport into account, have a bigger carbon footprint than the NZ imported product.

Similar research needs to be done in Australia to establish the carbon footprint of our produce and then accurate, positive information needs to be communicated to our high value, environmentally concerned customers.

New Opportunities

Biofuels

Demand for energy both as transport fuel and well as stationary energy like electricity has grown dramatically throughout the world during the 21st century. Since 2002, oil prices have risen dramatically. Together with the debate about reducing greenhouse emissions in order to avoid a dramatic change in the environment, there is a growing trend worldwide to look for alternative energy sources. Biofuels have been put forward as one of a range of alternatives.

Biofuels include both ethanol and biodiesel. Ethanol can be produced industrially or from fermentation of biomass feedstocks, including those typically obtained from agricultural sources like wheat. The next generation of technology could allow cellulosic material, such as crop waste, wood waste and grasses, to be economically used as feedstocks. The energy content of fuel ethanol is typically 68 per cent of the energy content of a litre of petrol, regardless of the feedstock used.

A move to full scale biofuel production in Australia offers many opportunities to Australian agriculture, but also some risks.

Studies on ethanol plants in NSW showed for plant capabilities ranging 50-80ML/year that there would be 6-34 permanent direct jobs, 125-357 permanent flow-on jobs, 49-68 construction direct jobs and 63-87 construction flow-on jobs and would also be expected to add significantly to the average income in the region.

The ethanol plant proposed for Swan Hill has an expected capacity of 100ML/year using wheat, corn & barley as the feedstocks.

An economic analysis of biofuel production found that the main factors influencing the rates of return were:

It is expected that relative movements of forecast world oil prices and forecast local feedstock prices are favourable for biofuel production but the drought has impacted on the availability, and thus the price, of feedstocks, such as wheat.

Government supports the production of ethanol through the payment of production grants (subsidies) of 38.143 cents a litre on biofuels. Fuel excise will begin to be applied on 1 July 2011, increasing annually until final rates of 12.5 cents a litre for ethanol (and 19.1 cents a litre for biodiesel) are reached on 1 July 2015. There are also a number of Government Grants to support the renewable energy industry development.

Productivity trends and Trade/Market trends for commodities